chapter 7 acct
Which of the following long-lived assets would not be depreciated?
land
Which statement is true about the straight-line method of depreciation?
It allocates an equal amount of depreciation to each year the asset is used.
The initial valuation of purchased intangible assets requires that the intangible asset is recorded at
original cost
Otto Inc. retires old equipment with a book value of $2,400. Otto should
recognize a loss of $2,400
Accounting for land improvements requires that the costs of land improvements are
recorded separately from the land itself.
Intangible assets are written down when events or changes in circumstances indicate that the asset's ______ amount is less than its _______ amount.
recoverable;recorded
An estimated residual value ___ the total amount of depreciation recorded over an asset's service life.
reduces
An asset ______ occurs when an asset is no longer useful, but cannot be sold.
retirement
Total depreciation recorded over an asset's service life is
the same regardless of the depreciation method used
Which items are considered changes in estimates that would be treated on a prospective basis in the current period and future periods?
change in residual value of an asset change in service life of an asset
True or false: Repairs and maintenance expenditures that do not increase the future benefit of the asset are expensed.
true
When assets are purchased in a group for a single sum, it is referred to as a
basket purchase
Recording depreciation results in the allocation of the cost of a long-term asset to the years during which the asset provides
benefits
When selling a fixed asset, the seller recognizes a gain or loss for the difference between the amount received and the ______ value of the asset sold.
book
The original cost of an asset minus accumulated depreciation is
book value
The original cost of the asset less the accumulated depreciation is the ________ ________ of the asset.
book value
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
The amortization of an intangible asset occurs over the period of time that is the ______ of the legal, regulatory, contractual, or service life.
shorter
Most companies use _____ - _______ amortization for intangible assets
straight line
What depreciation method results in an equal amount of depreciation each year?
straight line
Straight-line deprecation is calculated as the depreciable cost divided by
the estimated service life of the asset.
Which of these are parts of the journal entry to record depreciation?
credit to accumulated depreciation debit to depreciation expense
A change in accounting estimate requires a company to account for the change
current and future years
The service life or useful life of an asset is
the estimated use that the company expects to obtain from the asset before disposing of it.
The cost of successfully defending a patent should be added to:
the patent account
In a basket or lump-sum purchase of assets, the total acquisition cost is allocated to the individual assets by multiplying the lump-sum purchase price times
the relative fair value percentages of each asset.
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
The journal entry to retire old equipment that is not fully depreciated includes a:
debit to loss debit to accumulated depreciation credit to equipment
Machines used in manufacturing, computers, printers, vehicles, furniture, and fixtures generally are classified as
equipment
Which of the following involves both an acquisition and a disposition of an asset?
exchange of fixed assets
If an intangible right is not successfully defended, the legal costs should be
expensed
For a patent developed internally, the research and development costs are
expensed as incurred
True or false: Goodwill acquired in a business combination is amortized over its estimated service life.
false
Goodwill and some trademarks are examples of intangible assets that are assumed to a have a(n) ______ life.
indefinite
In accounting terminology, the life of a trademark is considered
indefinite
Amortization refers to the allocation of the cost of ___________ assets to expense.
intangible
An asset that has no physical substance is called a(n) ________ asset.
intangible
amortization
intangible assets
long-term assets are classified as
intangible, tangible
The two categories for intangible assets are
intangibles with indefinite lives. intangibles with finite lives.
Intangible assets that are acquired from other entities are referred to as purchased intangibles, whereas intangibles that are created by a company are referred to as
internally developed intangibles.
The method of amortization used for intangible assets
is most commonly straight-line.
The FASB requires research and development costs to be expensed because
it is difficult to determine whether costs will result in future benefits.
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.
The distinction between land and land improvements is that:
land has an indefinite life
The cost of land improvements are capitalized separately from land because land improvements tend to have a _____ useful life.
limited
______ ______ are physically diminished as minerals and other materials are extracted from the ground and are sold or used in the production process, whereas equipment, land, and buildings have physical characteristics that remain unchanged.
natural resources
Intangible assets with indefinite useful lives should
not be amortized
which of the following are long-term tangible assets
property and equipment
When we recognize depreciation, we allocate a portion of the asset's cost to each year in which the asset
provides benefits to the company.
When a company purchases another company and the purchase price is greater than the fair value of the net assets acquired, this excess is referred to as
goodwill
An accelerated depreciation method is appropriate when the asset will provide
greater benefits in the earlier years of the asset's life.
The issues that are important for tangible and intangible assets, include determining:
how to expense the cost of the asset over its life how to record the disposal of the asset what amounts to include in the cost
Expenditures classified as _______________ involve the replacement of a major component of an asset.
improvements
Goodwill may only be recognized
in a business acquisition
The exclusive legal right to manufacture a product or to use a process is called a(n) .
patent
A(n) ______ is the exclusive right to manufacture a product or use a process granted for a period of ______ years.
patent, 20
The accounting for copyrights uses the same accounting rules as
patents
A basket purchase or lump-sum acquisition of assets requires that an allocation is made to each individual asset based on the asset's
relative fair value
Costs of periodically servicing equipment is an example of
repair and maintenance
The types of expenditures that can occur subsequent to an asset's acquisition are
repairs and maintenance. additions. improvements.
Expensed
research and development costs
The depreciable cost of an asset is the asset's cost minus its estimated _____ value.
residual
value is the amount the company expects to receive for the asset at the end of its service life.
residual
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
The depreciation method that is easiest to apply and results in higher net income in earlier years is
straight line
The depreciation rate we use under the declining-balance method is a multiple of the ______- ______ method.
straight line
The most frequently used depreciation method for financial reporting is the ______ method.
straight line
Which of the following are commonly used depreciation methods?
straight line, declining balance, activity based
In a basket purchase of assets, the cost must be allocated to the individual assets because
the assets have different useful lives.
The formula for calculating declining balance depreciation is the depreciation rate per year times
the book value at the beginning of the year.
The depreciable cost is
the cost of a plant asset minus its estimated residual value
Which of the following are classified as natural resources?
timber tracts and mineral deposits
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 use
An asset that is traded for another asset is treated as a(n) ______, whereas an asset that is sold or retired is treated as a disposition.
to exchange
A(n) _______ is an exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service.
trademark
An exclusive right to display a word, slogan, symbol, or emblem that distinctively identifies a company, product, or service is referred to as a
trademark
which of the following are intangible assets
trademark goodwill
Which of the following intangible assets are usually considered to have indefinite lives?
trademarks goodwill
True or false: All long-term assets are subject to impairment rules.
true
True or false: The accounting treatment for the cost of copyrights is identical to that of patents.
true
True or false: The initial cost of property, plant, and equipment includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.
true
The residual value of an intangible asset is usually
zero
Smith Corporation acquired West Company by paying $5 million in cash. The total fair value of West's identifiable assets is $8 million and the total fair value of its liabilities is $4 million. The amount of goodwill reported by Smith Corporation relating to its acquisition of West is:
$1 million Reason: $5 mill - ($8 mill - $4 mill)
What is the accounting treatment for goodwill acquired in a business acquisition?
Capitalize the goodwill Test for impairment Do not amortize
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. Which of the following statements is true?
Clem will depreciate the machine for $150,000 over its service life.
Which of the following costs may be capitalized into the cost of a trademark?
Design costs Fees for a successful legal defense Registration fees
Capitalized as incurred
Expenditure increases future benefits derived from asset
Under what circumstances are accelerated depreciation methods most appropriate?
For an asset that will provide greater benefits in earlier years of its life. For an asset that will be used less in the later years of its life.
The term _____ means to record an expenditure as an asset.
capitalize
An expenditure that qualifies as an addition should be
capitalized
If an intangible right is successfully defended, the legal costs should be
capitalized
In accounting, expenditures recorded as assets are said to be
capitalized
The purchase price and all costs to bring an asset to its desired condition and location for use should be
capitalized
A(n) ________ is an exclusive right of protection given to a creator of a published work, such as a song, film, painting, photograph, or book.
copyright
Which of the following statements describe the accounting rules for a franchise agreement?
expense periodic payments as incurred capitalize cost of franchise amortize the cost of franchise over its life
Under IFRS rules for R&D, the costs of research-related activities are recorded as _______, while the costs of development-related activities are recorded as _______ _______.
expense, intangible asset
Expenditures for repairs and maintenance should be _____ in the period incurred.
expensed
An intangible asset that is measured as the purchase price less the fair value of the net identifiable assets is called
goodwill
A(n) ______ is protected by law and gives the creator of a published work the exclusive rights to reproduce and sell the work for the life of the creator plus 70 years.
copyright
The formula for straight-line depreciation is
(cost-residual value)/useful life
Which of the following items typically are classified as equipment?
- Computers and printers used in office - Machinery used in manufacturing - Furniture and fixtures
The formula to calculate an activity-based depreciation rate is:
(cost - residual value)/estimated total production.
True or false: Internally developed goodwill should be capitalized as an asset.
-False Costs of internally developed goodwill should be expensed as incurred.
What costs are capitalized as an intangible asset for a franchise?
-Initial payment for the franchise -Legal costs for the franchise agreement
Which of the following are classified as natural resources?
-oil deposits -mineral deposits
Sarah purchases land to be used for a new storage facility. Which of the following items are capitalized in the cost of land?
Commissions Legal fees to secure title Costs to remove an old building
Which of the following costs should be capitalized in the costs of acquiring a building?
Legal fees to obtain title, remoding building, realtor commissions
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?
Net income is lower. Total assets are lower
Purchased intangible asset
Patents, copyrights, trademarks, or franchise rights acquired from other companies.
Internally developed intangible asset
Product or process created internally for which patent may be obtained.
Which of the following expenditures are classified as repairs and maintenance for a vehicle owned by the company? (
Routine oil change engine tune-up
Which of the following does not differ among the different depreciation methods?
Total depreciation recognized over the asset's service life.
Which account is credited in a journal entry to record depreciation on machinery?
accumulated depreciation
Units of production or units of output are alternative terms for the _____ - ______ depreciation method.
activity based
Costs associated with major equipment improvements should be
added to the equipment account
Attorney fees and other costs necessary to secure a patent should be
added to the patent account.
On January 1, 20X1, Claire Corp. purchases a patent. One month after acquiring the patent, Claire paid $3,000 in legal fees to successfully defend its right to the patent. The $3,000 should be:
added to the patent account.
Mueller installs a new motor in its manufacturing equipment. The new motor is expected to decrease energy use by 25%. The related cost should be:
capitalized in the equipment amount
Costs that produce future benefits are ______, but costs that produce benefits only in the current period are ______.
capitalized, expensed
The cost of a major improvement that extends the service life of an asset would be _____, whereas the cost of maintenance that does not increase the future benefits would be _____.
capitalized, expensed
straight line
commonly used for financial purposes
MACRS
commonly used for tax reporting
True or false: Expenditures that qualify as an addition should be expensed in the period incurred.
false Reason: Additions that involve adding a new major component to an existing asset should be capitalized because future benefits are increased.
True or false: Repairs and maintenance expenditures should be capitalized in the period incurred.
false ;: Repairs and maintenance expenditures should be expensed in the period incurred.
A contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time is called a
franchise
A(n) ______ is a contractual arrangement in which one entity grants the purchaser the exclusive right to use the trade name, formulas, and product rights within a specific geographic area for a specific period of time
franchise
The key factor in classifying items as repairs and maintenance is that
future benefits are not provided beyond those originally anticipated from the asset.
At the beginning of year 1, Valerie Corp. purchases equipment for $10,000. The equipment has a residual value of $4,000 and an expected service life of 4 years. What is straight-line depreciation for year 1?
$1,500
On July 1, year 1, Smith Corp. purchased equipment for $200,000. The equipment has an expected service life of 10 years with no residual value. Smith uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$10,000 Reason: $200,000/10 years = $20,000 per year x 1/2 year = $10,000 depreciation expense in year 1.
Norbert Inc. purchases a machine for $21,000 with an estimated service life of three years and estimated salvage value of $1,000. The company utilizes the double-declining balance method. Depreciation expense for the last service year is: (Round to the nearest dollar.)
$1333 Reason: $(21,000 - [(21,000 x 2/3) + (7,000 x 2/3) + (1,000)] = $1,333
Berner Inc. internally develops a patent, which has an estimated value of $25 million. Related legal, design and registration fees were $155,000. The amount reported on Berner's balance sheet should be:
$155,000
On January 1, year 1, Paisley Corp. purchases equipment for $200,000. Paisley uses the double-declining-balance method of depreciation. The asset has a 10-year service life and a $10,000 residual value. What is the book value at the end of year 1?
$160,000
Blake uses the activity-based depreciation method. Blake purchases equipment for $100,000 and expects to use the equipment for 40,000 machine hours. The machine has a residual value of $20,000. The depreciation rate is
$2.00 per machine hour. (($100,000 - 20,000)/40,000 machine hours = $2.00 per machine hour.)
Smith Company acquires a franchise from West Corp for $200,000. The franchise agreement covers a period of 10 years. Compute amortization expense for the second year.
$20000
On January 1, year 1, London Corp. purchases equipment for $400,000. The equipment has a 5-year service life and a $50,000 residual value. London uses the double-declining-balance method of depreciation. What is the book value at the end of year 1?
$240,000
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 Rationale: Depreciation expense is ($50,000 - 10,000)/5 = $8,000 per year. $50,000 less accumulated depreciation of $24,000 = $26,000.
Cray uses the activity-based depreciation method. Cray purchases equipment for $210,000 and expects to use the equipment for 60,000 machine hours. The machine has a residual value of $30,000. The depreciation rate is
$3.00 per machine hour. Rationale: $210,000 - $30,000 = $180,000/60,000 machine hours = $3.00 per machine hour.
On October 1, year 1, Kirby Corp. purchased equipment for $100,000. The equipment has an expected service life of 5 years with no residual value. Kirby uses the straight-line method of depreciation. The partial year depreciation for year 1 is
$5,000 Reason: $100,000/5 years = $20,000 per year x 1/4 year = $5,000 depreciation expense in year 1. October 1 - December 31 is 3 months so 1/4 year.
On January 1, year 1, Roark Corp. purchased equipment for $120,000. The equipment has a residual value of $20,000, and has a life of 1,000,000 hours. Roark uses the activity-based method of depreciation. In year 1, Roark used the machine 30,000 hours, and in year 2, Roark used the machine 50,000 hours. What is the depreciation expense for year 2?
$5000
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.)
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 Rationale: $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.
At the beginning of year 1, Looby Corp. purchases equipment for $100,000. The equipment has a residual value of $20,000 and an expected service life of 10 years. What is straight-line depreciation for year 1?
$8,000
Which of the following costs should be capitalized in the costs of acquiring a building
-purchase price -realtor commissions -legal fees to obtain title
A trademark registered with the U.S. Patent and Trademark Office protects the trademark from use by others for a renewable period of
10 years
Kuhn Corporation acquired Salz Company by paying $65 million in cash. The total fair value of Salz's identifiable assets is $90 million and the total fair value of its liabilities is $40 million. The amount of goodwill reported by Kuhn Corporation relating to its acquisition of Salz is:
15 million
Lester purchased a new car for $30,000 and depreciated it straight-line over an estimated service life of five years with no residual value. After two years, Lester estimates that the remaining service life of the car is four years. Assuming that Lester continues to apply the straight-line method, depreciation recognized for each of the remaining years will be:
4,500
straight line method
Allocates an equal amount of depreciation to each year of the asset's service life
depletion
Allocation of the cost of a natural resource over its service life
amortization
Allocation of the cost of an intangible asset over its service life
Where is the account accumulated depreciation on equipment found on the financial statements?
As a contra account to equipment on the balance sheet
Linx purchases an intangible asset for $10,000. How should the $10,000 be reported in the financial statements?
As an asset for $10,000.
Linx Corporation internally develops an intangible asset with research and development costs of $10,000. How should Linx report this $10,000?
As an expense on the income statement
Which of the following items are capitalized into the cost of a patent?
Attorney fees to secure patent Purchase price Filing fees
Margot Company constructs a new building that will replace its current office building. In addition to construction materials and labor, which of following costs incurred during the construction period should be included in the cost of the new building?
Construction related overhead costs, Interest Costs, Architect fees
Which of the following items should be capitalized as land improvements?
Cost of fences Cost of parking lots Cost of sidewalks
Clarion purchases land and prepares it for use. Which of the following items should be capitalized as land improvements?
Cost of lawn sprinkler system, cost of driveways, cost of sidewalks
Larry purchases land to be used for a new corporate headquarters. Which of the following items are capitalized in the cost of land?
Cost to remove an old building, Title insurance, Legal fees to secure title, grading the land
Which of the following items are expensed?
Costs related to maintaining equipment
On December 30, 20X1, Rocket Corp. disposed of equipment with a historical cost of $100,000 and accumulated depreciation of $70,000. The equipment was sold for $80,000 cash. The journal entry to record the sale will include which of the following entries?
Credit equipment $100,000 Debit cash $80,000 Credit gain on sale of equipment $50,000 Debit accumulated depreciation $70,000
The journal entry to record the amortization of an intangible asset includes
Credit to the intangible asset, debit to amortization expense
Wall Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $100,000, and its accumulated depreciation at the date of exchange was $60,000. The new asset received had a fair value of $80,000 and a book value of $65,000. The journal entry to record this exchange will include which of the following entries?
Debit accumulated depreciation $60,000 Credit gain on exchange of asset $40,000 Debit equipment $80,000 Credit equipment $100,000
On December 30, 20X1, Brighton Corp. disposed of equipment with a historical cost of $150,000 and accumulated depreciation of $60,000. The equipment was sold for $70,000 cash. The journal entry to record the sale will include which of the following?
Debit accumulated depreciation $60,000 Debit loss on sale of equipment $20,000 Credit equipment $150,000 Debit cash $70,000
capitalized
Purchase price plus costs necessary to get asset ready for use
Monet Company purchased a patent with an estimated service life of ten years for $200,000 After three years of amortizing the patent using the straight-line method, Monet estimates that the remaining useful life is only 5 years. Amortization expense for the fourth year is:
Reason: [200K = (200K/10)*3] = 140k; 140K/5 = $28K
Which of the following are expenditures for assets subsequent to acquisition?
Repairs and maintenance Improvements Additions
Which of the following items are capitalized?
Replacing a major component Successful legal defense of a patent Major repair that increases future benefits
Which of the following costs are expensed under both U.S. GAAP and IFRS?
Research costs only
declining balance method
a depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset's useful life
A retirement or abandonment of an asset is different from a sale of an asset because
a loss must be recognized for the remaining book value. no cash is received.
Jan purchases a piece of land and immediately tears down an old building. The proceeds from selling the salvaged materials should be recognized as:
a reduction in the cost of the purchased land
Green Inc. expenses the cost of small tools provided that the amount is less than $1,000. This accounting treatment is:
acceptable if the amount is considered immaterial
Depreciation is a process of cost ________, and not a process of valuation.
allocation
Depreciation
allocation of the cost of a tangible asset over its service life
Allocating the cost of intangible assets to expense is referred to as
amortization
The journal entry to record the amortization for a patent would include a debit to _______ _______ and credit to _______
amortization expense; patent
The gain or loss on disposal of an asset is calculated as:
amount received less the book value of asset sold
A new major component that is added to an existing asset is called
an addition
The formula for calculating the double-declining-balance method is
book value at beginning of year x 2/estimated service life
The rationale for expenditures being capitalized as assets is based on whether the expenditures benefit ______.
future periods
Which of the following costs are capitalized as an asset for an internally developed patent?
legal fees and filing fees
In a business acquisition, goodwill equals the purchase price
less the fair value of net assets acquired.
The depreciation method that allocates an equal amount of the depreciable base to each year of the asset's service life is the
straight-line method
The declining balance method of depreciation is a multiple of the
straight-line rate of depreciation.
long-lived assets are typically classified in two categories:
tangible and intangible
Which of the following items are initially recorded as an expense on the income statement?
Research and development costs Advertising costs
For an asset with an estimated salvage value greater than 0, depreciation during the last service year may be less than the amount calculated based on the carrying value times the depreciation rate in order to avoid
depreciating part of the salvage value.
Cash received from selling salvaged materials:
reduces the cost of the land
Cheng Corporation exchanges old equipment for new equipment. The original cost of the old equipment was $90,000, and its accumulated depreciation at the date of exchange was $40,000. The new equipment received had a fair value of $40,000 and a book value of $35,000. The journal entry to record this exchange will include which of the following entries?
Debit equipment $40,000 Debit loss on exchange $10,000 Credit equipment $90,000 Debit accumulated depreciation $40,000
A subsequent expenditure for an asset increases the future benefits of the asset if it
Increases the operating efficiency of the asset increases the quality of the goods or services produced by the asset extends the asset's service life
Which of the following items should be capitalized in the cost of equipment?
Insurance of equipment during shipping, purchase price, freight to deliver the equipment to its location, installation and testing of equipment
Which of the following assets are depreciated?
land improvements, building, equipment
A purchased intangible is valued at its original cost. Original cost for acquiring a patent would include.
legal costs to acquire required filing fees purchase price
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 Rationale: The depreciation rate is 2 x 1/5 = 40%. $100,000 x 40% = $40,000 depreciation expense in year 1.
West Corp purchased a piece of equipment for $35,000 and depreciated it straight-line over an estimated service life of seven years with a residual value of $7,000. After two years, West estimates that the remaining service life of the equipment is four years and the residual value remains unchanged. Assuming that West continues to apply the straight-line method, depreciation recognized for each of the remaining years will be:
$5,000 Reason: The asset has been depreciated $8,000 to date. (($35,000 - $7,000)/7) x 2 = $8,000. The new book value is $35,000 - $27,000 = $8,000. (($27,000 - $7,000)/4) = $5,000 per year
Expensed as incurred
Expenditure yields benefits in current period only.
If a company generates its own goodwill through advertising or training, how should these costs be treated?
Expense costs as incurred
Because the future benefits of research and development costs are uncertain, FASB requires that research and development costs be treated as
an expense on the income statement
If a company replaces a major component of an asset with a new component with the same characteristics of an old component, it is classified as
an improvement
The service life of an intangible asset may be limited by what types of provisions?
contractual, legal, regulatory
Which depreciation methods allocate the cost of long-term assets based on time?
declining-balance straight-line
Straight-line, declining-balance, and activity-based refer to methods commonly used to ______ property, plant, and equipment.
depreciate
Using the declining balance method, depreciation will be
higher in earlier years, but lower in later years.
No amortization is recorded for
intangible assets with indefinite lives
Other terms used for an activity-based depreciation method are:
units of production method units of output method
On January 1, year 1, Clem Corp. purchased equipment for $160,000. The equipment has a residual value of $10,000, and has a life of 100,000 hours. Clem uses the activity-based method of depreciation. In year 1, Clem used the machine 2,000 hours, and in year 2, Clem used the machine 3,000 hours. What is the depreciation expense for year 2?
$4,500 Reason: The depreciation rate per unit is ($160,000 - $10,000)/100,000 hours = $1.50 per machine hour. Year 2 depreciation is 3,000 hours x $1.50 = $4,500.
On December 30, 20X1, Glaze Corp. disposed of equipment with a historical cost of $50,000 and accumulated depreciation of $30,000. The equipment was sold for $45,000 cash. The journal entry to record the sale will include which of the following entries?
Debit to cash $45,000 Credit to equipment $50,000 Debit to accumulated depreciation $30,000 Credit to gain on sale of asset $25,000
