Chapter 7
When a firm develops a trademark internally through advertising, it records the advertising costs as part of the cost of the intangible asset.
False
Accumulated Depreciation
A contra asset account representing the total depreciation taken to date.
Depreciation
A decrease or loss in value
Trademark
a word, slogan, or symbol that distinctively identifies a company, product, or service
A trademark is:
a word, slogan, or symbol that distinctively identifies a company, product, or service.
Accelerated depreciation method
allocates a higher depreciation in the earlier years of the asset's life and lower depreciation in later years
For accounting purposes, depreciation is
an allocation of a cost of an asset
Book Value
an asset's original cost less accumulated depreciation
Return on Assets Ratio
net income/average total assets
Residual (or Salvage) Value
value is the amount the company expects to receive for the asset at the end of its service life.
Asset Turnover
net sales/ average total assets. Measures the sales per dollar of assets invested
A retirement or abandonment of an asset is different from a sale of an asset because
no cash is received. a loss must be recognized for the remaining book value.
capitalize
record an expenditure as an asset
Big Bath
recording all losses in one year to make a bad year even worse
What is the two step impairment process?
Step 1: Test for impairment Step 2: If impaired, record loss
Residual value
The amount the company expects to receive from selling the asset at the end of its service life; also referred to as salvage value
Repairs and maintenance expenditures that benefit future periods are capitalized as an asset.
True
The allocation of the cost of a tangible fixed asset is referred to as BLANK whereas the allocation of the cost of an intangible asset is referred to as BLANK
depreciation, amortization
patent
exclusive right to manufacture a product or to use a process.
An asset that has no physical substance is referred to as a(n)
intangible asset.
The original cost of an asset minus accumulated depreciation is
book value.
Long-term tangible assets include
buildings. land. equipment.
The allocation of the cost of a tangible asset over its service life is referred to as
depreciation
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
material
large enough to influence a decision
The legal life of a patent is _____ years.
20
Which of the following are long-term tangible assets?
Property, equipment
Land has an unlimited useful life.
True
natural resources
assets like oil, natural gas, and timber that we can physically use up or deplete
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
What are the major type of intangible assets?
**Patents, copyrights, trademarks, franchises, and goodwill** long-term assets at their purchase price, plus all costs necessary to get the asset ready for use. Also used to examine profit margin and asset turnover.
Depreciation Method
*original cost-residual value* allocated over time
Krasel 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 $70,000. The new asset received had a fair value of $50,000 and a book value of $45,000. The journal entry to record this exchange will include which of the following entries?
Debit equipment $50,000 Credit equipment $90,000 Credit gain on exchange of asset $30,000 Debit accumulated depreciation $70,000
Repairs and maintenance
Expenses that maintain a given level of benefits in the period incurred
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 original cost of the asset less the accumulated depreciation is the blank, blank of the asset.
book, value
Asset Turnover Ratio
net sales/average total assets
Depreciation is the process of allocating the cost of an asset to a(n) _________ over its service life.
Expense
retirement
occurs when an asset is no longer useful, but cannot be sold.
declining balance method
An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years
The cost of ordinary repairs to equipment during the first year of service is added to the Equipment account.
False
improvement
The cost of replacing a major component of an asset
debit to loss debit to accumulated depreciation credit to equipment
The journal entry to retire old equipment that is not fully depreciated includes a:
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
The purchase price and all costs to bring an asset to its desired condition and location for use should be ______.
capitalized
The journal entry to retire old equipment that is not fully depreciated includes a:
credit to equipment debit to accumulated depreciation debit to loss
impairment
a permanent decline in the fair value of an asset
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the blank life of the asset.
service, useful, or depreciable
Is Franchise rights a tangible asset?
NO
The gain or loss on disposal of an asset is calculated as
amount received less the book value of asset sold
Return on Assets
Net income/ average total assets, measures the amount of net income generated for each dollar invested in assets
addition
Occurs when a new major component is added to an existing asset
Profit Margin Ratio
net income/net sales
basket purchase
purchase of more than one asset at the same time for one purchase price
Otto Inc. retires old equipment with a book value of $2,400. Otto should
recognize a loss of $2,400
The types of expenditures that can occur subsequent to an asset's acquisition are
repairs and maintenance. improvements. additions.
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.
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.
How is depreciation calculated for a property, plant, and equipment?
straight line method is most commonly used other methods include: declining balance activity based depreciation
Copyright
the exclusive legal right, given to an originator or an assignee to print, publish, perform, film, or record literary, artistic, or musical material, and to authorize others to do the same.
Amortization
the reduction of a loan balance through payments made over a period of time (intangible asset)
Land Improvements
Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation
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
Activity based method
Allocates an asset's cost based on its use
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
Describe the accounting treatment of expenditures after acquisition.
Assets=expenditures that benefit future periods Expense=items that only benefit current period
profit margin
Net Income/Sales
As natural resources are used, their cost is allocated to an expense through a process known as _____________.
Depletion
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
service life
How long the company expects to receive benefits from the asset before disposing of it; also referred to as useful life
How are disposals of long term assets recorded?
If MORE than the book value=GAIN If LESS than the book value=LOSS
Franchise
Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area
intangible assets
Long-term assets that lack physical substance, and whose existence is often based on a legal contract
What are major types of property, plant and equipment?
Tangible assets such as land, land improvements, buildings, equipment, and natural resources.
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
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
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
The gain or loss on disposal of an asset is calculated as:
amount received less the book value of asset sold
How is amortization of intangible assets calculated?
by allocating the cost of intangible assets over the estimated service life