ACC 301 Test 4

On July 1, 2017, Adele Company bought a trademark from Robert, Inc. for $2,750,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Robert's books was $1,600,000. In Adele's 2017 income statement, what amount should be reported as amortization expense? a) $160,000 b) $137,500 c) $275,000 d) $80,000

$137,500 Straight-line amortization, $2,750,000 (cost) / 10 years (useful life) X 6/12 (July 1 - December 31, 2017) results in an amortization expense of $137,500.

Lundy Company purchased a depreciable asset for $99,000 on January 1. The estimated salvage value is $18,000, and the estimated useful life is 9 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?

$16,988 The double-declining balance rate is 100%/9 x 2 = 22%. The first year's depreciation is (22% of book value of asset first of year - Year 1, $99,000) $21,780. The second year's depreciation is [22% of (book value of asset first of year - Year 2, $99,000 - $21,780)] or $16,988.

Antigua Company purchased a depreciable asset for $45,000 on October 1, 2015. The estimated salvage value is $9,000, and the estimated useful life is 6 years. The straight-line method is used for depreciation. What is the book value on July 1, 2017 when the asset is sold?

$34,500 (Asset cost, $45,000 - Salvage value, $9,000) / Useful life, 72 months results in a monthly depreciation of $500. After 21 months (October 1, 2015 - July 1, 2017), the balance in accumulated depreciation is $10,500 (21 months x $500), and the book value of the asset is $34,500 (Asset cost, $45,000 - Accumulated Depreciation, $10,500).

Lebanon Corporation owns equipment with a cost of $320,000 and accumulated depreciation at December 31, 2017 of $120,000. It is estimated that the machinery will generate future cash flows of $175,000. The machinery has a fair value of $155,000. If Lebanon uses IFRS, the company should recognize a loss on impairment of

$45,000 IFRS does not use the first-stage recoverability test. The impairment loss would be the $45,000 difference between the asset's book value of $200,000 ($320,000 - $120,000) and its fair value of $155,000.

Lumberyard Inc. incurred the following costs during the year ended December 31, 2017: Laboratory reserach aimed at discovery of new knowledge- $4,295,000 Costs of testing prototype and design modifications $712,500 Quality control during commercial production, including routine testing of products- $485,000 On December 31, 2017, purchase of research facilities having an estimated useful life of 20 years with alternative future use in other research & development projects- $7,360,000 a) $5,492,500 b) $4,780,000 c) $12,367,500 d) $5,007,500

$5,007,500 Laboratory research aimed at discovery of new knowledge of $4,295,000 plus costs of testing prototype and design modifications of $712,500 totals $5,007,500. Quality control during commercial production, including routine testing of products is not an R&D activity and the purchase of research facilities having an estimated useful life of 20 years with alternative future use in other R&D projects would be capitalized. The company won't account for depreciation expense as R&D in 2017.

Cambodian Import Company purchased a depreciable asset for $160,000 on April 1, 2014. The estimated salvage value is $40,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. What is the balance in accumulated depreciation on March 1, 2017 when the asset is sold?

$70,000 (Asset cost, $160,000 - Salvage value, $40,000) / Useful life, 60 months results in a monthly depreciation of $2,000. For 35 months (April 1, 2014 - March 1. 2017) the accumulated depreciation is $70,000 (35 months x $2,000).

Dixon Company purchased a depreciable asset for $32,000. The estimated salvage value is $4,000, and the estimated useful life is 4 years. The double-declining balance method will be used for depreciation. What is the depreciation expense for the second year on this asset?

$8,000 The double-declining balance rate is 100%/4 x 2 = 50%. The first year's depreciation is (50% of book value of asset first of year - Year 1, $32,000) $16,000. The second year's depreciation is [50% of book value of asset first of year - Year 2, ($32,000 - $16,000)] or $8,000.

refund of 1-month insurance premium because construction completed early

(building)

proceeds from salvage of demolished building

(land)

Special costs of land

- improvements with limited lives, such as private driveways, walks, fences, and parking lots, are recorded as land improvements and depreciated - land acquired and held for speculation is classified as an investment - land held by a real estate concern for resale should be classified as inventory land improvement account- can depreciate

restoration of impairment loss

- the reduced carrying amount becomes its new cost basis - no change in the new cost basis except for depreciation or amortization in future periods or for additional impairments -no restoration of impairment loss for an asset held for use

events leading to an impairment

-a significant decrease in the fair value of an asset -a significant change in the manner in which an asset is used - a significant adverse change in legal factors or in the business climate that affects the value of an asset - an accumulation of costs in excess of the amount originally expected to acquire or construct an asset - a projection or forecast that demonstrates continuing losses associated with an asset

Amortization of limited-life intangibles

-amortize to expense over useful life -credit assets account or accumulated amortization -useful life should reflect the periods over which the asset will contribute to cash flows -amortization should be cost less residual value -companies should evaluate the limited-life intangibles for impairment

balance sheet presentation of intangible assets

-intangible assets shown as a separate item -reporting is similar to the reporting of property, plant, and equipment -contra accounts are not normally shown for intangibles -companies should report as a separate item all intangible assets other than goodwill

costs associated with R&D Activities

-materials, equipment, facilities -personnel -purchased intangibles -contract services -indirect costs

amortization of indefinite-life intangibles

-no foreseeable limit on time the asset is expected to provide cash flows -must test indefinite-life intangibles for impairment at least annually -no amortization

income statement presentation of intangible assets

-report amortization expense and impairment losses in continuing operations -goodwill impairment losses should also be presented as a separate line item in the continuing operations section, unless the goodwill impairment is associated with a discontinued operation

estimating recoverable reserves

-same as accounting for changes in estimates - revise the depletion rate on a prospective basis - divide the remaining cost by the new estimate of the recoverable reserves

self-constructed asset costs

1) materials and direct labor 2) overhead which can be handled in two ways (1) assign no fixed overhead or 2) assign a portion of all overhead to the construction process) companies use the second method extensively

Which of the following costs of goodwill should be amortized over their estimated useful lives? 1. No Costs of goodwill from a business combination accounted for as a purchase and no costs of developing goodwill internally 2. No costs of goodwill from a business combination accounted for as a purchase and Yes costs of developing goodwill internally 3. Yes costs of goodwill from a business combination accounted for as a purchase and Yes- costs of developing goodwill internally 4. Yes costs of goodwill from a business combination accounted for as a purchase and No costs of developing goodwill internally

1- neither goodwill purchased or developed internally is amortized

Information necessary to disclose for PP&E

1. Depreciation expense for the period 2. Balances of major classes of depreciable assets, by nature and function 3. Accumulated Depreciation 4. A general description of the method or methods used in computing depreciation with respect to major classes of depreciable assets

Computation of the depletion base involves four factors

1. acquisition cost 2. exploration costs (to find it) 3. development costs (takes a long time, moving stuff but to get it) 4. restoration cost (get site back to how it was before)

Steps to calculating interest costs during construction

1. determine which assets qualify for capitalization of interest 2. Determine the capitalization period 3. compute weighted-average accumulated expenditures 4. compute the actual and avoidable interst 5. capitalize the lesser of avoidable interest or actual interest

special issues related to interest capitalization

1. expenditures for land -if the company purchases land as a site for a structure, interest costs capitalized during the period of construction are part of the cost of the plant, not the land -conversely, if the company develops land for lot sales, it includes any capitalized interest cost as part of the acquisition cost of the developed land 2. interest revenue - in general, companies should not net or offset interest revenue against interest cost

impairment of goodwill

1. if fair value is less than the carrying amount of the net assets (including goodwill), then perform a second step to determine possible impairment 2. determine the fair value of the goodwill (implied value of goodwill) and compare to carrying amount

Characteristics of intangible assets

1. lack physical existence 2. not financial instruments 3. normally classified as a long-term asset common examples: -patents -copyrights -franchises or licenses -trademarks or trade names -goodwill

For 2017, Lassiter Company reports beginning of the year total assets of $900,000, end of the year total assets of $1,100,000, net sales of $1,250,000, and net income of $250,000. Lassiter's 2017 asset turnover ratio is

1.25 times Asset turnover ratio = Net Sales / Average Total Assets = $1,250,000 / [($900,000 + $1,100,000) / 2] is 1.25 times.

The impairment rule for goodwill involves how many steps?

2

Full cost concept

Cost of drilling a dry hole is a cost needed to find the commercially profitable wells capitalized all the bad oil wells into the first good one (necessary cost)

True or False Interest revenue earned on borrowed funds during the construction of an asset to be used by a firm can be used to reduce the cost of interest to be capitalized.

False

True or False Depletion is normally calculated using the straight-line method.

False

indicate how the following item would generally be reported in the financial statements cost of developing a trademark

Expense

True or False The entry to record the sale of a plant asset at a loss includes a credit to Accumulated Depreciation

False Accumulated depreciation is a contra account with a credit balance. The entry to record the sale of a plant asset at either a gain or a loss will include a debit, not a credit, to Accumulated Depreciation.

True or False Impairment testing is performed in the same way for indefinite-life intangibles and limited-life intangibles.

False For indefinite-life intangibles, a company performs only the fair value test; for limited-life intangibles, a company performs a recoverability test and then a fair value test.

True or False If a company buys several intangible assets in a "basket purchase," the company should allocate the cost on the basis of the book values of the purchased intangible assets.

False If a company buys several intangible assets in a "basket purchase," the company should allocate the cost on the basis of the fair values, not book values, of the purchased intangible assets.

True or False Land held for speculative purposes is classified as Property, Plant, and Equipment but it is not depreciated

False Land held for speculative purposes is classified as an Investment, not as Property, Plant, and Equipment

True or False Cash or other assets received in an exchange are referred to as "boot"

False Only cash received in an exchange is referred to as "boot"

True or False Avoidable interest is the lesser of actual interest cost incurred during a fiscal period or the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset

False The interest to be capitalized for a self-constructed asset is the lesser of the actual interest cost incurred during the period or avoidable interest. Avoidable interest is the amount of interest cost incurred during the construction period that a company could theoretically avoid if it had not made expenditures for the asset.

True or False Obsolescence is the replacement of one asset with another more efficient and economical asset.

False The replacement of one asset with another more efficient and economical asset is termed supersession, not obsolescence

True or False Changes in the estimates used to calculate depreciation should be handled as a correction of an error and require an adjustment to the beginning balance of Retained Earnings.

False A change in estimate is not the same as a correction of an error. Such changes are used to change the depreciation charge in the current and prospective periods

Interest Costs during Construction

GAAP requires- capitalizing actual interest (with modification) only capitalize interest during construction- avoidable interest Consistent with historical cost capitalization considers three items 1. qualifying assets 2. capitalization period (building for long enough that this matters) 3. amount to capitalize

indicate how the following item would generally be reported in the financial statements Legal costs incurred in securing a patent

Intangible

indicate how the following item would generally be reported in the financial statements cost of purchasing a patent from an inventor

Intangible

indicate how the following item would generally be reported in the financial statements purchase cost of a franchise

Intangible

indicate how the following item would generally be reported in the financial statements long-term receviables

Long-term investment

Indicate if the following cost should be expensed when incurred $15,000 paid to replace single pane windows with hurricane-proof windows

No

Indicate if the following cost should be expensed when incurred $360,000 paid for addition to building

No

Indicate if the following cost should be expensed when incurred $4,000 paid for a major overhaul on a truck engine, which extends the useful life

No

Indicate if the following cost should be expensed when incurred $8,500 paid to rearrange and reinstall the assembly line

No

indicate how the following item would generally be reported in the financial statements Goodwill generated internally

Not recorded

indicate how the following item would generally be reported in the financial statements cost of equipment obtained

PP&E

indicate how the following item would generally be reported in the financial statements timberland

PP&E

indicate how the following item would generally be reported in the financial statements Lease prepayment

Prepaid rent

indicate how the following item would generally be reported in the financial statements Cost of testing in search of product alternatives

R&D Expense

indicate how the following item would generally be reported in the financial statements cost of conceptual formulation of possible product alternatives

R&D Expense

indicate how the following item would generally be reported in the financial statements research and development costs

R&D Expense

indicate how the following item would generally be reported in the financial statements Cost of developing a patent

R&D expense

indicate how the following item would generally be reported in the financial statements Cost of engineering activity required to advance the design of a product to the line manufacturing stage

R&D expense

indicate how the following item would generally be reported in the financial statements Cost of researching for applications of new research findings

R&D expense

True or False Total depreciation over an asset's life cannot exceed an amount equal to cost minus estimated salvage value.

True

True or False When nonmonetary assets are traded in an exchange that lacks commercial substance and no cash is received, any loss is recognized immediately.

True

True or False The residual value of an intangible asset should be assumed to be zero unless, at the end of its useful life, the intangible asset has value to another company.

True The residual value of an intangible asset should be assumed to be zero unless, at the end of its useful life, the intangible asset has value to another company

True or False A special assessment by the municipality for sidewalks and a drainage system would be included in the cost of land

True This type of one-time special assessment for sidewalks and drainage system would be included in the cost of the land since it is relatively permanent in nature

True or False A company can write up or write down an asset held for disposal in future periods as long as the carrying value after the write-up does not exceed the carrying amount before the impairment.

True A company can write up or down an asset held for disposal if future periods, as long as the carrying value after the write-up never exceeds the carrying amount of the asset before the impairment.

True or False Recording an impairment loss for an asset increases the balance in its Accumulated Deprecation account

True An impairment loss is recorded with a credit to Accumulated Depreciation which increases the balance in the account.

Indicate if the following cost should be expensed when incurred $1,400 paid to repaint the interior of a building

Yes

Which of the following is considered a research activity? a) critical investiagtion aimed at discovery of new knowledge b) operation of a pilot plane c) all of these answer choices are correct d) construction of a prototype

a) critical investigation aimed at discovery of new knoweldge

Production backlogs fall under which category of intangible assets? a) customer-related b) artistic-related c) marketing-related d) technology-related

a) customer-related

Depletion expense a) is usually part of cost of goods sold b) excludes restoration costs from the depletion base c) includes tangible equipment costs in the depletion base d) excludes intangible development costs from the depletion base

a) is usually part of cost of goods sold

A purchased limited-life intangible asset ______ amortized and is impairment tested using _______________. a) is; the recoverability test and then the fair value test b) is not; the fair value test only c) is not; the recoverability test and then the fair value test d) is; the fair value test only

a) is; the recoverability test and then the fair value test

Plant assets purchased in exchange for a zero-interest-bearing note should be accounted for at the a) present value of the note b) face value of the note c) book value of the asset received d) fair value of the asset received

a) present value of the note To properly reflect cost, companies account for assets purchased on long-term credit contracts (zero-interest bearing note) at the present value of the consideration exchanged between the contracting parties at the date of the transaction.

If an asset is sold at a gain, a) the book value of the asset is less than the proceeds received from the sale b) the fair value of the asset is greater than the proceeds received from the sale c) the cost of the asset is greater than its book value d) the proceeds from the sale are greater than the asset's cost

a) the book value of the asset is less than the proceeds received from the sale If an asset is sold at a gain, the book value of the asset is less than the proceeds received from the sale.

In computing partial-year depreciation, depreciation is normally computed on the basis of: a) the nearest full month b) the nearest fraction of a year c) a half year's depreciation in the period of acquisition and disposal d) a full year's depreciation in the period of acquisition and non in the year of disposal

a) the nearest full month

Which of the following is a characteristic of intangible assets? a) they are long-term in nature b) they are financial instruments c) they have physical existence d) they are all subject to amortization

a) they are long-term in nature

All of the following statements are true regarding IFRS accounting for property, plant, and equipment except: a) under IFRS, units-of-production depreciation is not permitted b) under IFRS, a fair value test is used to measure impairment loss c) under IFRS, interest costs incurred during construction must be capitalized d) under IFRS, depreciation is viewed as an allocation of cost over an asset's life

a) under IFRS, units-of-production depreciation is not permitted

Which of the following is not true of depreciation accounting? a) depreciation lowers the book value of the asset as it ages ad its fair value declines b) depreciation matches expenses against revenues over the periods which benefit from the asset's use c) depreciation is a process of cost allocation d) tangible assets with limited lives are depreciated

a)Depreciation lowers the book value of the asset as it ages and its fair value declines.

cost of land

all expenditures to acquire land and ready it for use 1) purchase price 2) closing costs, such as title to the land, attorney fees, and recording fees 3) costs of grading, filling, draining, and clearing 4) assumption of any liens, mortgages, or encumbrances on the property 5) additional land improvements that have an indefinite life land is not depreciated

lump-sum purchases

allocate the total cost among the various assets on the basis of their relative fair market values

Recording of legal fees and amoritzation for a patent at the end of the year

amortization expense (debit) patents-or accumulated amortization (credit)

research and development costs

are not in themselves intangible assets frequently results in something that a company patents or copyrights such as: new product, process, idea, formula, composition, or literary work companies must expense all research and development costs when incurred

impairment of assets to be disposed of

assets held for disposal are like inventory; companies -should report them at the lower-of-cost-or-net realizable value - can write up or down an asset held for disposal in future periods, as long as the carrying value after the write-up never exceeds the carrying amount of the asset before the impairment - should report losses or gains related to these impaired assets as part of income from continuing operations if you're going to dispose of an asset, you have to depreciate up until that point

deferred-payment contracts

assets purchased on long-term credit contracts at the present value of the consideration exchanged

impairment summary

limited life- recoverability test, then fair value test indefinite life other than goodwill- fair value test goodwill- fair value test on reporting unit, then fair value test on implied goodwill

Burchell Company purchased land and a building for a lump sum cost of $420,000. The land has a fair market value of $160,000 and the building has a fair market value of $320,000. The cost assigned to the land is a) $0 b) $140,000 c) $210,000 d) $160,000

b) $140,000 The lump sum price incurred to acquire more than one asset is allocated among them based on their relative fair market values: [Fair market value of land, $160,000/ (Fair market value of land, $160,000 + Fair market value of building, $320,000 = $480,000)] x (Lump sum cost, $420,000) = Cost assigned to the land,$140,000.

Oscar Company acquired a patent on a manufacturing process on January 1, 2015 for $5,100,000. It was expected to have a 12 year life and no residual value. Oscar uses straight-line amortization for patents. On December 31, 2016, the expected future cash flows from the patent are $387,500 per year for the next ten years. The present value of these cash flows, discounted at Oscar's market interest rate, is $3,050,000. At what amount should the patent be carried on the December 31, 2016 balance sheet? a) $3,875,000 b) $3,050,000 c) $4,250,000 d) $5,100,000

b) $3,050,000 The book value of the patent at December 31, 2016 is $4,250,000 (cost of $5,100,000 less 2 years amortization at $425,000 per year ($5,100,000 cost / 12 year useful life)). Since the sum of the undiscounted cash flows of $3,875,000 is less than the carrying value, the company must measure and recognize an impairment loss. The patent should be carried on the balance sheet at the present value of the $387,500 expected annual cash flows for the next 10 years, $3,050,000.

Bogle Company purchased machinery for $320,000 on January 1, 2014. Straight-line depreciation has been recorded based on a $20,000 salvage value and a 5-year useful life. The machinery was sold on May 1, 2018 at a gain of $6,000. How much cash did Bogle receive from the sale of the machinery? a) $54,000 b) $66,000 c) $46,000 d) $86,000

b) $66,000 A cost of $320,000 - $260,000 in accumulated depreciation (Cost, $320,000 - Salvage value, $20,000 / 5 years = $60,000 annual depreciation x 4 years = $240,000 + 2014 Depreciation, $60,000 x 4/12 months, $20,000) results in a book value of $60,000. Adding the $6,000 gain indicates sale price was $66,000.

Which of the following depreciation methods is not based on the passage of time? a) straight-line b) activity c)Sum-of-the-years'-digits d) Declining-balance

b) activity The Activity method assumes that depreciation is a function of activity or production, not time. Straight-line, declining base and sum-of-years digits are all time-based methods.

A principal objection to the straight-line method of depreciation is that it a) tends to result in a constant rate of return on a diminishing investment base b) assumes that the asset's economic usefulness is the same each year c) gives smaller periodic write-offs than decreasing charge methods d) provides for the declining productivity of an aging asset

b) assumes that the asset's economic usefulness is the same each year

An asset impairment occurs when the asset's carrying amount exceeds the: a) asset's fair value b) expected future net cash flows c) present value of expected future net cash flows d) asset's book value

b) expected future net cash flows

Which of the following is not one of the major categories of intangibles? a) marketing-related b) financing-related c) artistic-related d) contract-related

b) financing-related

Natural resources include all of the following except a) petroleum b) land improvements c) timber d) minerals

b) land improvements Natural resources include petroleum, minerals and timber. Land improvements are not natural resources.

When is the restoration of an impairment loss permitted? a) on assets that have been that have already been disposed b) on assets being held for disposal c) on assets held for use d) on all tangible assets whether held for use of disposal

b) on assets being held for disposal Assets being held for disposal are subject to continuous revaluation; therefore, the restoration of an impairment loss is acceptable as long as it does not exceed the amount of the original loss. A company can write-up or write-down an asset held for disposal in future periods as long as the carrying value after the write-up never exceeds the carrying amount of the asset before the impairment.

capitalization period

begins when: 1. expenditures for the asset have been made 2. activities for readying the asset are in progress 3. interest costs are being incurred ends when: the asset is substantially complete and ready for use

architect's fee on building

building

payment for construction from note proceeds

building

premium on 6-month insurance policy during construction

building

On January 1, 2017, Bumper Corp. acquires a customer list for $400,000. Bumper estimates that this customer list will generate value for at least 5 years. At the end of 3 years, Bumper plans to sell the customer list to another company for $62,500. On Bumper's income statement for the year ended December 31, 2017, how much amortization expense should it report? a) $133,333 b) $80,000 c) $112,500 d) $67,500

c) $112,500 Customer lists should be amortized over their useful life (lesser of useful life or legal/economic life): Annual Amortization Expense = Cost less residual value / useful life: ($400,000 - 62,500)/ 3 years = $112,500 annual amortization expense.

Texarkana Company exchanged equipment that cost $66,000 and has accumulated depreciation of $30,000 for equipment with a fair value of $48,000 and received $12,000 cash. The exchange lacked commercial substance. The gain to be recognized from the exchange is a) $18,000 gain b) $6,000 gain c) $4,800 gain d) $24,000 gain

c) $4,800 gain. The formula is [(Cash received, $12,000 / {Cash received, $12,000 + Fair value, $48,000}) X {(Fair value, $48,000 + Cash received, $12,000 - (Exchanged equipment cost, $66,000 - Accumulated Depreciation, $30,000)}], or Gain, $4,800.

Watauga Company purchased equipment on July 1, 2017 for $70,000. Sales tax on the purchase was $700. Other costs incurred were freight charges of $800, insurance during shipping of $ 150, repairs of $1,300 for damage during installation, and installation costs of $1, 050. What is the cost of the equipment? a) $70,000 b) $71,500 c) $72,700 d) $74,000

c) $72,700 The cost is the Purchase price, $70,000 + Sales tax, $700 + Freight charges, $800 + Insurance during shipping, $150 + Installation costs, $1,050 = $72,700. Repair costs are not capitalized.

Which of the following statements is true regarding capitalization on interest? a) interest cost capitalized in connection with the purchase of land to be used as a building site should be debited to the land account and not to the building account b) the minimum amount of interest to be capitalized is determined by multiplying a weighted average interest rate by the amount of average accumulated expenditures on qualifying assets during the period c) the amount of interest cost capitalized during the period should not exceed the actual interest cost incurred d) when excess borrowed funds not immediately needed for construction are temporarily invested, any itnerest earned should be offset against interest cost incurred when determining the amount of interest cost to be capitalized

c) The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred.

Which of the following is not a major characteristic of a plant asset? a) yields services over a number of years b) possesses physical substance c) acquired for resale d) acquired for use

c) acquired for resale A plant asset is possesses physical substance, yields services over a number of years, and is acquired for use in operations, not for resale.

property received through a contribution is to be recognized at its fair market value and offset with a credit entry to a a) paid-in capital amount b) miscellaneous gain account c) contribution revenue account d) additional paid-in capital account

c) contribution revenue account FASB requires that such contributions be recognized as revenues in the period received. Thus, the correct credit entry should be made to the Contribution Revenue account.

The cost of a self-constructed building should include all of the following except: a) overhead costs incurred during construction b) excavation costs c) costs of removing an old building on the new building site d) building permits

c) costs of removing an old building on the new building site The cost of removing an old building is a cost of getting the land ready and relates to the land instead of the new building. The other costs listed are included in the cost of the building.

In an exchange that lacks commercial substance in which a gain exists and cash is received, the asset received is recorded at the: a) fair value of the asset given up less cash recieved b) book value of the asset given up less cash received c) book value of the asset given up less the deferrred portion of the gain d) fair value of the asset received less the deferred portion of the gain

c) fair value of the asset received less the deferred portion of the gain. When cash is received in an exchange that lacks commercial substance and a gain exists, the asset received is recorded at the fair value of the asset received less the deferred portion of the gain, not the book value of the asset given up less the deferred portion of the gain.

Capitalizing goodwill only when it is purchased in an arm's-length transaction, and not capitalizing any goodwill generated internally, is an example of a) accrual accounting winning out over cash-basis accounting b) GAAP winning out over IFRS c) faithful representation winning out over relevance d) financial accounting winning out over managerial accounting

c) faithful representation winning out over relevance

IFRS permits revaluation of a) indefinite-life intangible assets b) all of these answer choices are correct c) limited-life intangible assets d) goodwill

c) limited-life intangible assets IFRS permits revaluation of limited-life intangible assets; however, revaluations are not permitted for goodwill or indefinite-life intangible assets.

Research and development costs do not include a) searching for applications of new research findings b) construction of prototypes c) routine ongoing efforts to improve the qualities of an existing product d) critical investigation aimed at discovering new knowledge

c) routine ongoing efforts to improve the qualities of an existing product

An impairment of property, plant, or equipment has occurred if a) the estimated salvage value is less than the actual proceeds received on disposal b) the revised estimated useful life is less than original estimated useful life c) the sum of the expected future net cash flows is less than the asset's carrying value d) the expected future cash outflows exceeds the asset's carrying value

c) the sum of the expected future net cash flows is less than the asset's carrying value.

Which of the following would not be amortized? a) patent b) copyright c) trade name d) customer list

c) trade name trade names have legal protection for an indefinite number of renewals for 10 years each; therefore, a company that uses an established trade name may properly consider it to have an indefinite life and does not amortize its cost.

The controversy surrounding the policy to expense all research and development costs associated with internally created intangible assets results in a) overstating assets and overstating expenses b) overstating assets and understating expenses c) understating assets and overstating expenses d) understating assets and understating expenses

c) understating assets and overstating expenses Expensing all research and development costs associated with internally created intangible assets results in understating assets and overstating expenses

cost of parking lots and driveways

land improvements

amount to capitalize

capitalize the lesser of actual interest or avoidable interest

successful efforts concept

companies should capitalize only the costs of successful projects

accounting for contributions(donations)

companies should use: 1. the fair value of the asset to establish its value of the books 2. should recognize constributions received as revenues in the period received

costs subsequent to acquisition

costs incurred to achieve greater future benefits should be capitalized; expenditures that simply maintain a given level of services should be expensed in order to capitalize costs, one of three conditions must be present: 1. useful life must be increased 2. quantity of units produced must be increased, and 3. quality of units produced must be enhanced

Customer-related intangible assets

customer lists, order or production backlogs, and both contractual and non-contractual customer relationships. capitalize acquisition costs amortized to expense over useful life you can buy and sell these most have a useful life

installation of fences around property

land improvements

indicate how the following item would generally be reported in the financial statements investment in a subsidiary company

long-term investments

Economic factors that shorten the service life of an asset include a) obsolescence b) supersession c) inadequacy d) all of these answer choices are correct

d) all of these answer choices are correct

Which of the following costs have characteristics which are similar to Research & Development (R&D) costs? a) start-up costs for a new operation b) computer software costs c) advertising costs d) all of these answer choices are correct

d) all of these answer choices are correct

The excess cost of the purchase over the fair market value of a company's identifiable net assets is sometimes referred to as a) goodwill b) a master valuation account c) a gap filler d) all of these answer choices are correct

d) all of these answer choices are correct Goodwill is measured as the excess of the cost of the purchase over the fair value of the identifiable net assets (assets - liabilities) purchased. Goodwill is therefore measured as a residual rather than measured directly. This is why goodwill is sometimes referred to as a plug, a gap filler, or a master valuation account.

For indefinite-life intangibles other than goodwill, an impairment test should be conducted at least a) quarterly b) once during its useful life c) monthly d) annually

d) annually

The most extensively used method of accounting for overhead costs related to self-constructed assets implies: a) assigning a portion of all overhead to the asset b) allocating overhead on the basis of lost production c) assigning no fixed overhead to the asset d) assigning a pro rata portion of fixed overhead to the asset

d) assigning a pro rata portion of fixed overhead to the asset Many companies assign a pro rata portion of fixed overhead to the asset as they believe that it results in a better recognition of these costs in periods benefited.

The cost of land includes all of the following except: a) cost of leveling and grading b) purchase price c) payments to clear liens d) cost of fencing and lighting

d) cost of fencing and lighting The cost of land includes the purchase price, payments to clear liens, and the cost of leveling and grading. It does not include the cost of fencing and lighting which are be appropriately recorded as Land Improvements because these expenditures have limited lives and thus, are depreciated.

In an exchange of non monetary assets that lacks commercial substance in which a gain exists and no cash is paid or received, the asset received is recorded at: a) book value of the asset given up plus the deferred gain b) fair value of the asset given up less the deferred gain c) book value of the asset received less the gain deferred d) fair value of the asset received less the gain deferred

d) fair value of the asset received less the gain deferred. In exchanges of nonmonetary assets that lack commercial substance not involving cash received where gains exist, the asset received is recorded at the fair value of the asset received less the deferred gain.

A plant site donated by a township to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at a) one dollar (since the site cost nothing but should be included in the balance sheet) b) the value assigned to it by the company's directors c) the nominal cost of taking title to it d) its fair value

d) its fair value The donated asset should be recorded at its fair value

Property, plant, and equipment includes a) deposits on machinery not yet received b) idle equipment awaiting sale c) land held for possible uses as a future plant site d) none of these answer choices would be classified as Property, plant, and equipment

d) none of these answer choices would be classified as Property, plant, and equipment

Which of the following research and development costs may be capitalized? a) contract services b) indirect costs c) personnel d) research and development equipment with alternative future uses in other research and development projects or otherwise

d) research and development equipment with alternative future uses in other research and development projects or otherwise

exchange lacks commercial substance- cash received

recognize partial gain; recognize losses immediately

A general description of the depreciation methods applicable to major classes of depreciable assets a) is not a current practice in financial reporting b) is not essential to a fair presentation of financial position c) is needed in financial reporting when company policy differs from income tax policy d) should be included in corporate financial statements or notes thereto

d) should be included in corporate financial statements or notes thereto

All of the following statements regarding IFRS accounting treatments for intangibles are true except: a) IFRS permits revaluation on limited-life intangible assets b) IFRS allows reversal of impairment losses when there has been a change in economic conditions c) Under IFRS, costs in the development phase of research and development costs are expensed once technological feasbility is achieved d) IFRS permits some capitalization of internally generated intangible assets

d) under IFRS, costs in the development phase of research and development costs are expensed once technological feasability is achieved This statement is false. Under IFRS, costs in the development phase of Research & Development costs are capitalized once technological feasibility is achieved.

exchange lacks commercial substance- no cash recieved

defer gains; recognize losses immediately

cash discounts

discount for prompt payment discount amount is still deducted, even if they forgeited it

Property, plant, and equipment

durable assets, plant assets, fixed assets -used in operations and not for resale -long term in nature and usually depreciated -possess physical substance -materiality ex) land, building structures- offices, factories, warehouses, and equipment- machinery, furniture, and tools historical cost- measures the price of obtaining the asset and bringing it to the location and condition necessary for its intended use (historical cost is reliable and should only recognize gains and losses when the asset is sold) put on books at what it cost us to buy them at the time

Journal entry to capitalize interst

equipment (debit) interest expense (credit)

repairs

expenditures that maintain assets in condition for operation

indicate how the following item would generally be reported in the financial statements cost incurred in the formation of a corporation

expense

indicate how the following item would generally be reported in the financial statements training costs incurred in start-up of new operation

expense

journal entry to unsuccessfully defend a patent

expense or loss (debit)

present value discounted

fair value

True or False An indefinite-life intangible asset is amortized over the shorter of its useful life or its legal life

false

True or False Depreciation is a means of adjusting an asset's cost to its fair value

false Depreciation is a means of cost allocation, not valuation.

True or False Intangible assets are normally classified as current assets

false in most cases, intangible assets provide service over a period of years and are therefore classified as long-term assets

contract-related intangible assets

franchise and licensing agreements, construction permits, broadcast rights, and service or supply contracts franchise (or license) with a limited life should be amortized to expense over the life of the franchise franchise with an indefinite life should be carried at cost and not amortized

valuation internally created intangibles

generally expensed Research and development always expensed recorded at cost only capitalize direct costs incurred in developing the intangible such as legal costs (even if R&D says its directly related, DO NOT CAPITALIZE)

goodwill write-off

goodwill considered to have an indefinite life should not be amortized only adjust carrying value when goodwill is impaired bargain purchase- purchase price less than the fair value of net assets acquired; amount is recorded as a gain by the purchaser

cost of equipment

include all expenditures incurred in acquiring the equipment and preparing it for use - purchase price - freight and handling charges - insurance on the equipment while in transit - cost of special foundations if required - assembling and installation costs, - costs of conducting trial runs

costs of buildings

includes all expenditures related directly to acquisition or construction 1) materials, labor, and overhead costs incurred during construction 2) professional fees and building permits

additions

increase of extension of existing assets

indicate how the following item would generally be reported in the financial statements Cost of purchasing a coypright

intangible

indicate how the following item would generally be reported in the financial statements Goodwill acquired in the purchase of a business

intangible

indicate how the following item would generally be reported in the financial statements cost of purchasing a trademark

intangible

indicate how the following item would generally be reported in the financial statements unrecovered costs of a successful legal suit to protect the patent

intangible

commission fee paid to real estate agency

land

cost of land fill and clearing

land

cost of razing and removing building

land

cost of real estate purchased as a plant site

land

cost of trees and shrubbery (permanent)

land

delinquent real estate taxes on property assumed

land

rearrangement and reinstallation

movement of assets from one location to another

depletion

natural resources, often called wasting assets, include petroleum, minerals, and timber have two main features: 1. complete removal (consumption) of the asset 2. replacement of the asset only by an act of nature depletion is the process of allocating the cost of natural resources NOT crops; when you extract natural resource, you're increasing inventory

return on assets ratio

net income/ average total assets rate of return on assets = profit margin on sales x asset turnover

profit margin on sales ratio

net income/net sales

asset turnover ratio

net sales/average total assets

write off of resource cost

normally, companies compute depletion (cost depletion) on a units-of-production method (activity approach). Depletion is a function of the number of units extracted during the period depletion cost per unit = (total cost-salvage value)/total estimated units available depletion= units extracted X cost per unit residual value is often salvage value

impairments

not going to benefit in the future as much as we thought when the carrying amount of an asset is not recoverable, a company records a write-off referred to as an impairment writes asset down to its fair value

money borrowed to pay building contractor

notes payable

indicate how the following item would generally be reported in the financial statements operating losses incurred in the start-up of a business

operating loss

Technology-related intangible assets

patented technology and trade secrets granted by the U.S. Patent and Trademark Office Patent gives holder exclusive use for 20 years (not the same over all industries, 20 years is the maximum, if not stated assume 20) capitalize costs of purchasing patent expense any R&D costs in developing a patent (Expense even if it says costs are directly related) amortize over legal life or useful life, whichever is shorter

journal entries to successfully defend a patent

patents (debit) cash (credit)

research activities

planned search or critical investigation aimed at discovery of new knowledge

Artistic-related intangible assets

plays, literary works, musical works, pictures, photographs, and video and audiovisual material copyright granted for the life of the creator plus 70 years capitalize the costs of acquiring and defending amortized to expense over useful life

Goodwill

plugged in number represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized only recorded when an entire business is purchased goodwill is measured as the excess of cost of the purchase over the FMV of the identifiable net assets (assets less liabilities) purchased

limited-life intangibles

purchased- capitalize internally created- expense (unless direct cost) amortization- over useful life impairment test- recoverability test and then fair value test

indefinite-life intangibles

purchased-capitalize internally created-expense (unless direct cost) amortization-do not amortize impairment test- fair value test only

exchange has commercial substance

recognize immediately any gains or losses on the exchange when the transaction has commercial substance

valuation purchased intangibles

recorded at cost includes all costs necessary to make the intangible asset ready for its intended use typical costs include purchase price, legal fees, other incidental expenses

impairment of limited-life intangibles

recoverability test- if the sum of expected future net cash flows is less than the carrying amount (book value) of the asset, an impairment has occured fair value test- the impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset the loss is reported as part of income from continuing operations, other expenses and losses section

Qualifying assets

require a period of time to get them ready for their intended use two types of assets: 1. assets under construction for a company's own use 2. assets intended for sale or lease that are constructed or produced as discrete projects

impairment of indefinite-life intangibles other than goowill

should be test for impairment at least annually impairment test is a fair value test-if the fair value of asset is less than they carrying amount, an impairment loss is recognized for the difference;no recoverability test

costs similar to R&D costs

start-up costs for a new operation initial operating losses advertising costs computer software costs

improvements and replacements

substitution of an improved asset for an existing one

avoidable interest

the amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset

issuance of stock

the market price of the stock issued is a fair indication of the cost of the property acquired

depreciation

the process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset allocating costs of long-lived assets: -fixed assets = depreciation expense - intangibles = amortization expense (no salvage value) - natural resources = depletion expense (not actually an account, use COGS)

marketing-related intangible assets

trademarks or tradenames, newspaper mastheads, internet domain names, and noncompetition agreements in the US trademarks or trade names have legal protection for indefinite number of 10 year renewal periods capitalize acquisition costs no amortization

development activities

translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use

composite method depreciation

used when the assets are dissimilar and have different lives

group method depreciation

used when the assets are similar in nature and have approximately the same useful lives